Gdc Digital Cinema Network Ltd and Another v. Global Digital Creations Holdings Ltd and Another

HCA 2358/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2358 OF 2013

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BETWEEN

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Introduction

1.The 1^st and 2^nd plaintiffs took out a writ against the 1^st and 2^nd defendants on 3 December 2013 for an order that the defendants vacate premises rented by the plaintiffs which were co-occupied with the defendants under a license the plaintiffs had terminated by notice, requiring the 1^st and 2^nd defendants to vacate the premises on 1 December 2013.[1]

2.The plaintiffs make application for an interlocutory injunction ordering the 1^st and 2^nd defendants to vacate the premises they currently occupy with the 1^st and 2^nd plaintiffs within 14 days.  The summons for the application was taken out on 3 December 2013 with a return date on 6 December 2013.[2]  The summons was adjourned to 20 January 2014 for argument.[3]  Having considered the papers and submissions, in my judgment the application fails.

3.The parties were once part of the same group of companies but in September 2011 the controlling shareholding in the plaintiffs was sold and they left the group.  The plaintiffs claim that it was agreed that the defendants continue to use the premises rented by the plaintiffs under a monthly license for which they would pay 50 percent of the rent and expenses.  The defendants argue in response that they are co-tenants or contractual licensees as evidenced by the arrangement since January 2010 that they share the premises and share 50 percent of the rent and expenses. 

Brief facts

4.The 1^st plaintiff, the 2^nd plaintiff and the 2^nd defendant were once part of the same group of companies engaged in the cinema business under the control of the 1^st defendant, a publicly listed company in Hong Kong.  On 6 September 2011, there was a change in ownership of the 1^st and 2^nd plaintiffs when the 1^st defendant disposed of its controlling interest in them.  The 1^st defendant, however, eventually retained an indirect interest of 11.5 percent in each of the 1^st and 2^nd plaintiffs.

5.In 2010, the group of companies centralised their operations at Kodak House.  This resulted in tenancy agreements being executed by the 1^st plaintiff to lease Workshops Nos. 1 to 3 commencing on 14 January 2010 for a term of 3 years with an option for a further 3 years and the 2^nd plaintiff to lease Workshops Nos. 4 and 5 and Store Room No. 3 on the same terms as the other lease but with a different monthly rent.   The parties shared the use of the premises equally between them.  The 1^st plaintiff would issue a debit note each month to the 2^nd defendant for its share of the rent and expenses which it would pay.  It is claimed by the defendants that the parties contributed to the renovation and decoration costs for the premises when the leases were taken out which each company was to depreciate over a period of 6 years being the total term of the lease upon renewal.  The defendants are claiming compensation for the costs incurred by them for the renovation and furnishing of the premises.

6.In about May 2012, before the time limit for the exercise of the option under the lease agreements, the defendants requested the landlord that they be added as lessees under the renewed lease agreements.  It is claimed that a similar approach was also made to the plaintiffs.  The request was refused.  The landlord dealt with the plaintiffs as the existing lessees and executed new lease agreements on 12 June 2012 in their name only to rent the premises for a further 3 years commencing on 14 January 2013. The 1^st plaintiff continued to issue debit notes to the 2^nd defendant as before.  Under the renewed lease period, the previous arrangement in sharing the accommodation and costs continued.

7.By written notice dated 2 September 2013, the plaintiffs requested the defendants to vacate the premises by 1 December 2013.  This gave the defendants about 12 weeks to vacate and relocate in other premises.

Legal principles

8.It is common ground that the fundamental purpose of an injunction in the context of the underlying cause of action is to prevent injustice.  This has been given legislative recognition by section 21L of the High Court Ordinance, Cap 4 [4] where the court may grant a final or interlocutory injunction when it appears “to be just or convenient to do so”.  It can be in the form of an order requiring a party to do (a mandatory injunction), or to refrain from doing (a prohibitory injunction), a specified act.  The risk of injustice is an important measure as to whether or not an injunction should be granted.  This poses a dilemma for the courts as injustice may be visited to either the plaintiff or the defendant depending on the ultimate outcome of the trial.  Hoffmann J in Films Rover International Ltd and Ors v Cannon Film Sales Ltd [1987] 1 WLR 670 addressed this dilemma by noting that the courts should take the course that appeared to carry the lower risk of injustice but clearly only if it is appropriate to do so.  He said:

“The principal dilemma about the grant of interlocutory injunctions, whether prohibitory or mandatory, is that there is by definition a risk that the court may make the ‘wrong’ decision, in the sense of granting an injunction to a party who fails to establish his right at the trial (or would fail if there was a trial) or alternatively, in failing to grant an injunction to a party who succeeds (or would succeed) at trial. A fundamental principle is therefore that the court should take whichever course appears to carry the lower risk of injustice if it should turn out to have been ‘wrong’ in the sense I have described. The guidelines for the grant of both kinds of interlocutory injunctions are derived from this principle.”[5]

9.The key principles concerning the grant of an interlocutory injunction are contained in the well known authority of American Cyanamid.  The court must be satisfied that there is a serious question to be tried and consider whether the balance of convenience lies in favour of granting or refusing the injunction.[6] Once satisfied that there is a serious question to be tried, the court will go on to consider whether the damages awarded at trial or payable under an undertaking are adequate remedies, and if it is decided that they would not be adequate, the court will next assess where the balance of convenience lies.[7]  The process involved was more aptly described as the “balance of the risk of doing an injustice”.[8]

10.As a mandatory injunction requires a defendant to do a specified act, as compared to a prohibitory injunction which refrains a defendant from doing a specified act, a higher standard of proof is required from a plaintiff so that the court feels a high degree of assurance that at trial it will be shown that the injunction was rightly granted.  This is generally the court’s approach.  However, a mandatory injunction may still be granted, notwithstanding a court is in doubt as to the adequacy of the respective remedies in damages.  This occurs when the balance of convenience is tilted so much in the plaintiff’s favour that justice requires the grant of an injunction.[9]  This arises, as explained by Hoffmann J in Films Rover International Ltd:

“If it appears to the court that, exceptionally, the case is one in which withholding a mandatory interlocutory injunction would in fact carry a greater risk of injustice than granting it even though the court does not feel a “high degree of assurance” about the plaintiff’s chances of establishing his right, there cannot be any rational basis for withholding the injunction.”[10]

11.The approach a court should take when considering a mandatory interlocutory injunction has been usefully set out by Ma J (as the Chief Justice then was) in Music Advance Ltd v The Incorporated Owners of Argyle Centre Phase I [2010] 1041 at 1046-1048.  He too emphasised that whilst the general approach employed a higher standard of proof than in the case of a prohibitory interlocutory injunction, there may be exceptions to this general approach as explained by Hoffmann J.

Cases for the parties

12.The plaintiffs claim that the defendants are monthly licensees and that they have previously requested them to vacate the premises but more recently in June 2012 reluctantly allowed them to remain a bit longer.[11] 

13.The plaintiffs argue that the defendants are licensees which have been served with a valid notice to vacate by 1 December 2013. They claimed they were given reasonable time to vacate the premises, and having failed to do so, are now trespassers.

14.In late 2012, the plaintiffs sought advice to be listed as a public company.  It is claimed that they were advised that they should not share office premises with the 1^st and 2^nd defendants because of concern that as a publicly listed company confidential or sensitive information could be compromised.

15.The plaintiffs also claim that they need extra space due to the expansion of their business and the expiration of the lease for Workshop 8.  They further claim that as a consequence, they are carrying out packaging of products in the corridor and they have been warned by the Fire Department not to do this as this may attract penalties against them.

16.The defendants on the other hand claim that the plaintiffs executed the renewed lease agreements on their behalves as co-tenants of the premises.  It is argued in the alternative that the plaintiffs hold all the rights and interests under the lease agreements on trust for the defendants or that the defendants are contractual licensees or subtenants, and entitled to remain in possession of the premises until the completion of the term of the renewed lease agreements.

Submissions of the parties

17.Ms Lorinda Lau, for the plaintiffs, initially made this application on the basis that the plaintiffs were seeking a prohibitory interlocutory injunction.  In the course of submissions, she addressed the application in terms of a mandatory interlocutory injunction.  The plaintiffs in their Skeleton Submission refer to the principles in American Cyanamid[12] and submit that the injunction sought should be granted because they can show there is a “serious issue to be tried”; that damages will not be an adequate remedy; and that the balance of convenience lies in their favour.

18.Ms Lau submits that the defendants occupy the premises under licence.  She relies on Minister of Health v Bellotti and Anor [1944] 1 KB 298 where it was held that a licensor can terminate a licence at any time as long as reasonable time is given within which the determination is to take effect.[13]  She argues that by a written notice dated 2 September 2013, the defendants were given over 12 weeks to vacate the premises by no later than 1 December 2013.  The defendants disagree, and argue that whilst the plaintiffs were the lessees in name, they held the leasehold interest for them as well. 

19.Ms Lau also relies on the case of International Trademart Co Ltd v Club Regency Ltd, HCA 1243/2008, unreported, where Saunders J granted an interlocutory injunction restraining a tenant from remaining on or using the rented premises in question.  The facts of that case were very different to the present case.  There the tenant was in breach of its lease conditions and the landlord refused to renew the lease.  The tenant however remained in possession and the court relied on the principle in Patel v Smith [1987] 1 WLR 853 that a landowner whose title is not in issue is entitled to restrain a trespasser on his land. The defendants here are arguing that the plaintiffs hold the leasehold interests on both their behalves or that they have a contractual licence for the duration of the term of the renewed lease agreements.

20.Ms Lau argues that under the lease agreements it is not permissible to assign, sublet or share occupation of the premises and the leases, therefore, are at risk of being terminated by the landlord.[14]  The point is that this arrangement has always been the case and it appears the landlord was aware of the sharing arrangement of the premises by the parties.

21.Ms Lau submitted that the plaintiffs had been given advanced notice to vacate in that they were asked to do so as early as the fourth quarter of 2011 with written notice to quit issued on 2 September 2013.  This indicates to me that whilst the plaintiffs may have initially wanted the defendants to vacate the premises in 2011, nothing much was done about it for 2 years when the notice to quit was issued.[15]

22.When asked what harm the plaintiffs would suffer if the injunction sought was not granted, Ms Lau submitted the following matters.

(1) The risk that the landlord would terminate the lease agreements because of the occupation by the defendants was in breach of the provision against assigning, subletting and sharing occupation of the premises.

(2) Insufficient space available to the plaintiffs to conduct their business as they have not renewed the lease of 2 units that were used as storerooms.

(3) The risk of being in breach of the requirements as an industrial user.

(4) The risk of being in breach of Fire Department regulations prohibiting carrying out packaging of products in the corridors.

(5) The requirement that two publicly listed companies not share premises where there is a risk of confidential or sensitive information being compromised.

23.Ms Lau argues that these matters will cause a grave injustice to the plaintiffs and therefore the injunction sought should be granted.  I note, however, that they are matters that either the plaintiffs can address and sort out or have occurred for some time and there is no element of urgency about them. 

24.Ms Lau also argues that any prejudice to the defendants by the grant of the injunction can be remedied by an undertaking from the plaintiffs for any damages that they may incur if they were to succeed at trial. The difficulty I have with this is that the application in my view clearly seeks a mandatory interlocutory injunction in that it is requiring the defendants to do the very act that the plaintiffs seek the defendants to do by its cause of action which the defendants contest.  That in itself, is not a bar to grant the injunction sought, but it is important to bear in mind that the application is being made at a stage where the issues have not been fully ventilated and the evidence has not been tested under the glare of a full hearing at trial.  In my assessment of the arguments for the defendants provide a triable case on their behalves.

25.If the plaintiffs were to succeed at the trial, the defendants would be required to vacate the premises and pay an award of damages for the loss sustained as a result of the defendants remaining in occupation of the premises until the time of trial.  It should be borne in mind that this arrangement between the parties has existed since the premises were leased by the plaintiffs and continued several years after the change of ownership of the plaintiffs.[16] If the defendants were to succeed at the trial, and the interlocutory injunction sought had been granted in that the defendants were made to vacate the premises within 14 days and relocate their operations, it is questionable whether the defendants would be adequately compensated by the plaintiff’s undertaking to pay damages for any loss sustained.

26.Mr Douglas Lam[17], for the defendants, has taken me to a series of debit notes from the 1^st plaintiff to the 2^nd defendant claiming its share of the rent and expenses of the premises for the months from April 2010 to November 2013.  The description of the debit note is “50% sharing of rental and related utilities expenses”.  It appears the items listed include all expenses incurred for the rent and use of the premises which are shared between the parties on an equal basis.  It includes rent, government rates, building management fees, as well as operational charges, such as, air-conditioning charges, electricity and water, distilled water, telephone charges, internet charges and office cleaning charges.  It also includes what appear to be periodic payments such as insurance cover for the office, license fee for enclosure of common areas and stamp duty fees for the tenancy agreement renewal (which first appeared in the debit note for January 2013).[18]  This latter billing is significant, as the 2^nd defendant is being requested to pay a share of the stamp duty fees for the renewal of the lease agreement.

27.Mr Lam relies on the agreement between the parties that was struck back in 2009 that they share the accommodation of the premises.  This was when they were all part of the same group, but he argues that the agreement was still current on the parties even though the plaintiffs had been effectively sold off to another entity, resulting in them leaving the group on 6 September 2011.  He argues that any change of shareholding does not vitiate or set aside any agreement that was binding between the parties.  However, this was more of an arrangement made within the group of companies and the change of shareholding brought about a change of circumstances with the plaintiffs leaving the group.

Conclusion

28.The plaintiffs seek a mandatory interlocutory injunction against the defendants to vacate the premises which is the object of the claim.  They argue that the defendants share the premises as monthly licensees.  The defendants argue that they have a legal right to remain in possession with the plaintiffs of the premises.  This has been an arrangement for some time and I am of the view that the defendants have a triable case. The debit notes evidence a long standing arrangement between the parties which supports the defendants in their argument that they were co-tenants or contractual licensees.  However, there has been a significant change of circumstances by the 1^st defendant selling off its controlling interests in the two plaintiffs.  I am not satisfied that the injunction sought should be granted in that I do not feel that there is high degree of assurance that the trial of the action will show that the injunction would have been rightly granted.  I am also of the view that the balance of convenience falls in favour of the defendants and there is a risk of injustice to them far greater than that to the plaintiffs if the injunction sought was granted.

29.For the foregoing reasons, I find that the granting of the injunction sought does not satisfy the relevant considerations and would give rise to an unacceptable risk of injustice to the defendants.  Accordingly, this application is dismissed with costs to the defendants to be taxed if not agreed. 

30.I am not unsympathetic to the position of the plaintiffs, and it appears that the parties need to make a break from each other and go their separate ways now that ownership of the plaintiffs is in new hands.  The circumstances of this case call for an expedited hearing and I make such an order.

Ms Lorinda Lau, instructed by Eddie Lee & Company, for the 1^st and 2^nd plaintiffs

Mr Douglas Lam and Mr David Chen, instructed by Li & Partners, for the 1^st and 2^nd defendants